Merchant Financing: New Term in the Market Creating a Buzz for Businesses

merchant financing

Most aspiring entrepreneurs think that the biggest struggle for new businesses is finding enough funds to start and maintain daily operations. 

However, according to an IBM Institute for Business Value and Oxford Economics report, 90% of Indian start-ups fail not due to lack of funds, but because of lacking innovation. Comparing this with survey reports that only 16% of financing availed by businesses in this sector are from the formal financial market, it is easy to surmise that the Indian MSME sector is faced with multiple challenges.

Innovation as a variable to business success will only improve with time, where successful business ventures yet to take shape can help create a platform for other fledgeling start-ups to grow. 

But, the lack of financing solutions available for businesses can only be solved by financial firms willing to offer the same.

Today, business loans are readily available from several reputed financial companies. But it is the newer forms of business financing, e.g. merchant finance, which is offering start-ups with the option to avail short term leverage for substantial business gains.

What is merchant financing?

Merchant financing, also known as Merchant Cash Advance, refers to special credit available to business owners from the respective financer. 

In case of such financing, the business does not need to repay the borrowed sum through EMI payments. Instead, the lender collects the principal and interest for such loans by deducting a percentage from the business’s daily debit/credit card transactions. 

Listed below is an example to illustrate merchant funding:

Suppose you operate a restaurant business and opt for merchant financing. During the first day of the repayment tenor, your restaurant witnesses a business of Rs.50000 through credit cards/debit cards. 

Your merchant financing lender will directly deduct a predetermined percentage from this amount on that day. On the second day, your restaurant experiences poor business, amounting to Rs.8,000 through debit/credit cards.  Therefore, the lender is only liable to receive the specific percentage repayment on this sum for that day.

Similarly, on the days when your business remains closed, there is no repayment.

Opting for merchant financing is one of the ways to ensure your business never runs out of working capital and continues with smooth business operations.

Eligibility criteria to avail merchant finance in India

If you are wondering how to get funding for a business, you have two primary options – business loans and merchant financing. Meeting the following factors is necessary to avail of merchant financing from lenders in India.

  • You need to have a stable business.
  • Each lender has a different requirement for annual turnover. Your company or business must either meet this amount or exceed it.
  • The business must be accepting credit card payments for a specified period before applying for finance.
  • Your CIBIL or credit rating must match the requirement set by your lender.

Benefits of merchant finance

Business owners are increasingly turning toward merchant finance options to seek funding for their enterprise-related expenses. 

There are many reasons why viz. –

  • Unsecured loans – You do not need to provide collateral against the funding. Therefore, a merchant finance is available even if you do not possess an asset to pledge against the financing option.
  • Quick approval – With an online application, availing such loans have become easier and much more convenient.
  • No financial burden – The repayment process is more comfortable since the lender can only charge a percentage of the daily business your company achieves. On slower days or periods, your repayment burden decreases automatically and vice versa.

What to do if you are ineligible for merchant finance?

Since merchant finance is only available against turnover, businesses cannot readily utilise the funds beyond their operational requirements. Business loans are an alternative source of funding. 

These hassle-free loans are easy to avail, offered against certain eligibility criteria but available over and above working capital limitations. Like merchant finance, business loans are unsecured forms of credit. Moreover, these loans can help you implement a big project effortlessly. Merchant financing is a relatively new financing product in India. Several lenders have yet to support such forms of credit fully. If you are facing difficulty finding merchant cash advance, avail a business loan instead.